Regulatory compliance and reducing risk are quickly becoming top priorities for cryptocurrency exchanges as more jurisdictions around the world require licensing, risk controls, data security, Know Your Customer (KYC) and Anti-Money Laundering (AML).
That leaves exchanges with an easy choice: Operate only in the relatively few regions that don’t enforce strict requirements, or implement compliance programs that protect their customers and business and help them take advantage of the expanding global interest in the industry.
For those exchanges that choose the latter, the IDC Spotlight: Digital Identity Verification for Global Cryptocurrency Exchanges, sponsored by Trulioo, suggests:
Implementing a robust and secure digital identity verification program is key for crypto exchanges to mitigate financial and reputational risk.
Digital identity verification helps cryptocurrency exchanges meet fundamental compliance requirements. Beyond that, effective identity measures help onboard customers quickly and easily while mitigating fraud.
Achieving cryptocurrency KYC compliance
KYC is generally the first step of a robust compliance workflow because it occurs during customer onboarding. Effectively identifying the customer at sign-up helps block synthetic or fraudulent accounts.
That identity data also fuels due diligence and assessing risk. Sanction scanning, which is the requirement to check identities against AML and other watchlists, also requires accurate data to work effectively.
While financial services have long required KYC, early crypto ventures had no specific laws and often operated without identity requirements. But even before crypto KYC laws, financial regulators around the globe were providing opinions and guidance for the industry.
Now, more regulations are on the way. In the EU, the Regulation on Markets in Crypto Assets (MiCA) likely will be law soon. Many countries in East and Southeast Asia already have crypto regulations or are developing them.
In the U.S., according to the IDC Spotlight, “IDC expects the U.S. government will soon establish a comprehensive regulatory framework, giving confidence to institutional and retail investors, as well as daily users, to adopt cryptocurrencies.”
KYC, by itself, is not sufficient for an effective compliance program, but it’s necessary to operate in regions with crypto laws.
Know your exchange
Knowing who your customers are transacting with is becoming increasingly necessary. The Financial Action Task Force recommends the so-called travel rule, which includes “obligations to obtain, hold, and transmit required originator and beneficiary information.”
For example, under MiCA, cryptocurrency exchanges must share and record certain information about the originator and beneficiary of a crypto transfer between hosted wallets or an exchange of €1,000 or more with someone who has an unhosted wallet.
The move toward more regulation and stricter KYC and Know Your Business compliance for the crypto industry seems unavoidable.
“Money launderers, bad actors, and other criminals will constantly seek new methods for illegal financial activities,” according to the IDC Spotlight. “Additional regulations will be implemented to reduce money laundering across the world.”
Crypto exchanges that understand the legal requirements and have flexible systems that can scale to meet new regulations can position themselves for success. Simplifying and speeding up licensing approvals, regulator audits and internal compliance teams’ ability to handle complex workflows can provide a competitive advantage.